Factors that have an impact on market volatility
Firstly, it’s important to understand the factors affecting market volatility. The causes are complicated, but can be grouped into three main points:
Inflation: Rising inflation over a period of time. To curb inflation, central banks are increasing interest rates. This makes borrowing money less attractive, which should slow down the economy.
News: The spread of COVID-19 and political tensions in Ukraine are recent examples of factors that create a climate of uncertainty in the markets. These types of factors have many effects on the jobs market and on the economy.
Receding optimism: Stock prices surpassed historic highs in 2021. A climate of uncertainty can easily undermine investors' high expectations. Combined with a dip in consumer confidence, optimism in the markets is rapidly declining.
Though it’s normal to have concerns, staying calm is always the best strategy for savvy investors. Investors who let their emotions drive them risk entering and exiting the stock market at the wrong times, reducing the return on their investment portfolio.
As illustrated in the chart below, a bull market gives investors enthusiasm and overconfidence and makes them feel like now is the best time to invest further. A bear market, on the other hand, causes fear, panic and despair, and makes investors think about selling everything quickly to save their money. In both cases, if investors let themselves be guided by their emotions, they may see decreased returns or miss out on opportunities for gains.
Assess your personal situation and keep your original goals in mind
The best investment choices depend on a number of factors: family situation, dependants, current financial situation, assets, liquidity needs, risk tolerance, investment knowledge, etc. The amount invested and to be invested, the time you have before you retire and your risk tolerance are the three main factors you should consider.
Every investor has a different personal situation and their own unique investor profile. It’s important to always keep in mind your initial investment goals as well as your investment horizon. This will help you make sure your emotions don’t interfere with your investments.
Avoid the trap of early disbursement
To avoid the risk of an impulsive disbursement, take the time to put your situation in perspective and consider all the advantages of long-term investing.
To better understand the trap of early disbursement, let’s look at this scenario with an investor who invested $10,000 in 1986. By missing the 10 best stock market days of the last 35 years*, he would have $100,000 less in his portfolio in 2020 than if he had left his money invested.
Read, watch and listen. From organisms, to magazines, newspapers, blogs and podcasts, there are many different platforms where you can find financial and economic news. In a hurry and short on time? Podcasts are becoming more and more popular and offer an easy way to learn while you’re getting things done or during your commute.
It’s important to get your information from a variety of sources for a more accurate and informed picture of the situation. Be curious and find out which ones speak to you the most!
Ask for advice
Your financial advisor is your best ally and we encourage you to contact them when you need to so you can make informed decisions about your financial future.
Still don’t have an advisor? Make the first step towards your financial future!
- Don’t let your emotions take you in the wrong direction
- Stay calm, avoid reacting too quickly
- Assess your personal situation
- Take the long view and stay invested
- Get informed
- Ask for advice
"The investor's chief problem—and even his worst enemy—is likely to be himself."
- Benjamin Graham
* Source: Refinitiv. S&P/TSX Composite Index total returns from January 1, 1986, to December 31, 2020. Past performance is no guarantee of future results.